Fixed or Adjustable-Mortgage Rate?

Which one is better for Home Buyers: A Fixed or Adjustable-Mortgage Rate?

You’re ready to embark on the journey to home ownership and now you’ve got some things to consider. One of them – we’re sure – is deciding which kind of mortgage loan you’re shopping for: a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). Even if you’ve got your mind set on one, it’s always good to know the difference between the two.

Fixed-Rate Mortgage

This is the one every home buyer thinks of when they think of mortgages. A fixed-rate mortgage (FRM) means the interest rate you agree to on your mortgage is locked in, making it so that for however long your loan term is (15 or 30 years), your monthly mortgage payments stay the same. If your intention is to purchase a home you could see yourself growing old in; the fixed-rate mortgage may be right for you. Although the interest rate may be higher than the initial interest rate of an ARM, what you’re essentially paying for is stability.

A fixed-rate mortgage is more advantageous if you qualify for a lower interest rate because you’ll guarantee yourself lower monthly payments. A low or high interest rate is mostly determined by your credit score, so it’s in your best interest to get your score to a minimum of 700 to increase your chances of qualifying for a better rate. If you’re struggling with your credit score consider these credit score repairing tips to get you moving in the right direction.

Adjustable-Rate Mortgage

Most home buyers cringe at the thought of an adjustable-rate mortgage (ARM) since the 2008 mortgage crisis, but believe it or not, an ARM could be a viable option for you if you don’t mind a little bit of uncertainty. The most appealing factor of an ARM is that the initial interest rate offered tends to be lower than a fixed-rate mortgage, so if you aren’t planning on occupying for a short period of time, an ARM is something to consider.

Unlike the fixed-rate mortgage, the interest rate you agree to is only guaranteed for a certain period of time such as 3 or 5 years. Afterwards, depending on your loan agreement, your rate can fluctuate as often as every 6 months, but most ARMs are set to adjust annually. Just how much your interest rate increases depends on what is called an index. Majority of ARMs have a “cap” set in place so there is a limit on how high your interest rate can go.

Deciding Between a Fixed or Adjustable-Rate Mortgage

When trying to decide between a fixed or adjustable-rate mortgage, it boils down to knowing what you’re looking for and doing what you’re comfortable with. A fixed-rate mortgage appeals to homebuyers who seek stability, want predictable payments, and don’t see themselves selling their home for years to come. An adjustable-rate mortgage is for homebuyers who can handle adjustable payments and who can see themselves selling their homes in the near future.

If you need a little more guidance on making the best decision for you, contact your Personal Loan Consultant today.